INTRODUCTION

Since the industrial revolution burning of fossil fuels has resulted in rapid rise of CO2 which causes ‘greenhouse effect’. (Ritchie & Roser, 2017). This is directly responsible for climate change.
The Kyoto Protocol is an international agreement linked to the United Nations which commits member states by setting internationally binding emissions reduction targets. (United Nations, 2019)
The largest contributor to climate change was identified as CO2 which makes it the focus of world-wide climate change actions. (National Atmospheric Emissions Inventory, 2018)
In 2008 Climate Change Act was enacted in the UK with the aim that by the year 2050, the net UK carbon emissions is at least 80% lower than the 1990 baseline. To achieve this goal, the Government set up five Carbon budgets schemes at five-year intervals. (Legislation.gov.uk, 2008).
In Dec 2008, the Committee on Climate Change was launched under the Climate Change Act as an independent non-departmental public body to advise the UK Governments and devolved administrations on how to approach tackling climate change issues. (Wikipedia, 2018).
Amongst its roles, the Committee on Climate Change monitors the UK’s progress in reducing emissions and meeting carbon budget target and suggests actions to keep budgets on track. (Committee on Climate Change, 2015).
The target limits the amount of CO2 the UK can legally emit within each five-year period. The budgets are as follows; first: 2008 to 2012 reduce by 25%; second: 2013 to 2017 reduce by 31%; third: 2018 to 2022 reduce by 37%; fourth: 2023 to 2027 reduce by 51% and the fifth: 2028 to 2032 reduce by 57%. (Committee on Climate Change, 2018).
The Energy institute conducted a survey in which majority of participants believe that the UK is on track to miss 2030 carbon target as published in a 2017 edition of The Guardian. (The Guardian, 2017).
Coming up with solutions to assist the Government achieve its goals is challenging. There are policies and initiatives that create viable business ventures. One of those opportunities is in the use of Heat Pumps for heating domestic, commercial and communal buildings. (Committee on Climate Change, 2018)
While there are different types of heat pumps, the main focus of this report is on the deployment of Ground Source Heat Pump (GSHP) as one of the solutions to reducing UK CO2 emissions.

TECHNOLOGY OVERVIEW

Ground Source Heat Pump (GSHP) system exploits the temperature of the ground or ground water beneath a location and use it as a source of heating through radiators. The pump does the same job as a gas boiler except it is environmentally friendly, no burning of fossil fuel and only a fraction of the electricity is required to run the pump.
They work by pumping a mixture of water and antifreeze around the ground loop which absorbs heat from underground. The mixture is compressed and goes through a heat exchanger which extracts the heat and transfers it to the heat pump which in turn is transferred to the heating system and heats up the room. (Morgan, No Date)
There are two main types of GSHPs Open & Closed loop systems;
Open Loop System;
Closed Loop Vertical system;
Closed Loop Horizontal System;

UK MARKET OVERVIEW

Sales of GSHPs generally are in two categories; Installation in new buildings and retrofit installations to replace and existing heat pump at the end of its life or replacing another type of system.
Currently, 85% of UK home heating relies on gas boiler central heating.
Renewable heating represents 2% of the heating systems and 1% is air source heat pumps, being considerably more common than GSHPs.
The latest Building Services Research and Information Association (BSRIA) study indicates that around 22,000 heat pumps were installed in the UK in 2017, which represents an increase of 18% in volume compared to the previous years.
Around 3.6 million homes in England and Wales are currently off the mains gas grid. Of those, around 2 million use electric heating (mostly old- fashioned electric storage heaters) and 1 million use oil heating – of which half are non-condensing. The vast majority of those dwellings can be targeted for the installation of heat pump-based heating.
There are currently around 900,000 homes in the UK with solar Photovoltaic (PV) panels installed. PV and heat pumps can be seen as complementary technologies hence they, as well, represent a significant potential for heat pumps. (Christidis , 2018)
GSHP is a niche market dominated by small specialist installers and large manufacturers of the dominant traditional gas boilers who have expanded their portfolios to include GSHPs. (Hardy, Sudgen, & Dale, 2016)
Figure 1: UK GSHP growth scenario projections. It illustrates annual installation rate and total installed systems from 2009 to 2020. It can be seen under the growth scenario that from 2017 onwards the installation rate starts to level off at approximately 40,000 units/yr, resulting in a total of approximately 320,000 units by 2020. (Pharoah & St John Cox, 2009)

GSHP MACRO ENVIRONMENT

The GSHP Macro Environment looks at broad environmental issues that may affect the business performance. These are; Political, Economic, Sociological, Technological, Environmental and Legal. Auditing these issues is known as PESTEL analysis. (Jobber & Ellis-Chadwick, 2013)
Political: The main political issue facing the future of GSHP in the UK right now is the BREXIT debate, uncertainties and the political climate after the deadline has come and gone. Trade war between the USA and China could have an indirect effect on the GSHP market. Another issue is politics around the Renewable Heat Incentive (RHI) scheme and uncertainty which affects tariffs. (Department for Business, Energy and Industrial Strategy, 2018) Climate change Act 2008. Political instability.
Economic: Installation cost. Profitability of investment. Tax credit. Financial crisis. Economic growth of the country. Household income. Inflation.
Sociological: Lack of consumer knowledge. Age distribution of prospective customers. Household structure, Uncertainty about cost and performance of GSHP
Technological: Lack of GSHP infrastructure. Competition with other technologies. Advances in GSHP technology. Distribution channels. Reliability of equipment. Microgeneration Certification Scheme (MCS) accredited.
Environmental: Sustainable energy. Environmentally friendly. Climate change issues.
Legal: Building regulations: Government regulations aiming at making new residential buildings “zero carbon homes” should influence the uptake of GSHPs. Effects of BREXIT on Trade laws with the European Union and the rest of the World. (Kariuki, 2018)

GSHP MICRO ENVIRONMENT

GSHP micro environment looks at factors that are directly linked to and more specific to the existing or proposed business. In this case, factors that will play a direct role establishing this GSHP installation company and that can affect its capabilities to operate effectively in the market. (Jobber & Ellis-Chadwick, 2013)
GSHP Micro Factors:

• Customers; They are the centre of marketing effort and it is their needs and expectations that must be met through effective deployment of GSHPs.
• Competitors; To be successful in the competitive GSHP market, it is not sufficient to satisfy customers but to be vigilant and closely monitor activities of the competition and competitors. Understanding their strengths and weaknesses is key.
• Suppliers; They are key players in the GSHP industry. Issues that can affect the supply chain like political unrest should be monitored closely as suppliers can influence costs.
• Shareholders: The key decision makers in the GSHP company
• Distributors; They can affect flow of equipment to suppliers and subsequently influence costs for installers. Their activities need monitoring so proactive action can be taken. (Jobber & Ellis-Chadwick, 2013)

Figure of GSHP Micro factors cycle;
Porters Five Forces of Competition Model for GSHP;

• Threat of New Entrants; New GSHP companies, Foreign GSHP companies
• Competitive Rivalry; Other established GSHP companies like: Kensa Heating, ICAX, Amber heating etc
• Supplier Power; Due to the niche nature of GSHPs in the UK, equipment manufacturers, logistics companies and distributors all have an impact.
• Buyer Power; Property developers, housing associations, high end home owners with unlimited resources can influence profitability
• Substitute Products; Other products that can perform the same task as GSHPs; ASHP, Biomass boiler, Solar, Gas boiler and can be cheaper

Figure of Five forces model;

COMPETITOR ANALYSIS

There are two things to consider. Direct Competitors and Indirect Competitors.
The Direct Competitors are those also in the GSHP installation business. There are over 50 GSHP installers listed on the GSHP association website. (Ground Source Heat Pump Association, 2019)
Competitor Matrix:
Company or Brand Customer Needs (CCF) Direct Competition (Other GSHP Companies) Indirect Competition (Other Renewable Systems) Substitutes? (Efficient Gas Boilers)
GSHP Company • Environmentally Friendly Renewable Heating

• Cost Saving

GSHP SWOT ANALYSIS

This allows for the close assessment and evaluation of internal GSHP Strengths and Weaknesses and to focus on the external Threats and Opportunities;
GSHP SWOT Analysis;
Strengths:

• Reduced Carbon Emissions: GSHPs have significantly less carbon emissions compared to other forms of heating and they have an efficient conversion rate of energy to heat.
• Cheap to run: GSHPs are cheaper to run than combustion systems. The more energy efficient the systems are the greater the long-term savings on energy
• Less Maintenance: Due to having few moving parts, GSHPs require less maintenance than combustion systems.
• Long Life Span: Heat pumps have an average life of 14 to 15yrs however they are exceptionally reliable and can last up to 50yrs
• RHI Scheme: There are two Government schemes to assist with some of the costs of renewable heating; Domestic and Non-Domestic Renewable Heat Incentive schemes.

Weaknesses:

• Quasi Renewable: Only a truly renewable technology when electricity is sourced from renewable source like solar panels or wind turbines.
• Upfront Installation Costs: Expensive to install and costs can be prohibitive
• Improper Installation: Infrastructure is still growing which means not all contractors are familiar with or properly trained to install GSHPs. If not installed correctly, the pump will subsequently perform poorly.
• Planning Permission: In Wales and Northern Ireland, special planning permissions are required for approval before installation of GSHPs. While in England and Scotland, it depends on location and size of property.

Opportunity:

• Flexibility: Highly flexible in application especially in new build situations
• Ideal replacement for OIL and liquefied gas buildings in rural locations and not connected to the gas grid
• Domestic and commercial new build projects are candidates for GSHPs especially in line with Government emissions targets and advocating for zero carbon new buildings

Threats:

• Physical space required for installations
• BREXIT uncertainty
• Can increase local electricity demand
• Cheap availability and cost of gas creates strong competition

COST ASSUMPTIONS

Overall expected annual profit was set conservatively at 8%
Scenario Discount Factor (%) Bulk Buy Discount (%) Annual Pump Sales Investment Cost (£)
1 5 5 15-60 150000
2 7 7 100-190 300000
3 9 5 250-340 500000

PRICING

Initial Price Calculations:

PROJECTION AND TURNOVER

Cash Flow Scenario 1: Payback within 3.5yrs. Low profit margins offset with RHI payments. Projected turnover in 5yrs is: £259,455. Most optimist scenario as profit increase better than other cases. However, it takes longer to pay back the investment.
Cash Flow Scenario 2: Payback within 2yrs. Low profit margins offset with RHI payments. Projected turnover in 5yrs is: £1,610,093. Not particularly optimistic scenario as profit is rising very slowly.
Cash Flow Scenario 3: Payback within 1.5yrs. Profit offset with RHI payments. Projected turnover in 5yrs is: £17,378,071. This is the worst case as profit is decreasing year on year.

SEGMENTATION

GSHP Segmentation will be approached via the benefits method because GSHPs are sought primarily for their benefits and opportunities as shown in the SWOT analysis.
Benefits segmentation is an approach where it is possible to identify market segments by casual factors rather than descriptive factors. The basis of this strategy is that the benefits people seek in consuming a particular product are the basic reasons for the existence of true market segments. This approach has demonstrated that benefits determine customer behaviour more accurately than demographic characteristics. (Haley, 1968)
Segmentation exercise identified four groups based on their needs; Environment Savers: This group is interested in GSHP as a way of improving the environment and having a positive effect on climate change.
Less Bill Payers: Their main interest in GSHP is in the long-term benefit of saving them money.
Change Seekers: These are high end home owners who have large properties in rural areas and are interested in GSHP as a replacement for their less efficient system. Property Developers: These are home builders interested in making the switch from installing traditional gas boilers to GSHP in their portfolio of properties mainly to be known as builders of energy efficient homes and to meet government targets.
GSHP Segmentation Matrix:
Segment Name Characteristics Profile
Principal Choice Factors
Environment Savers They are passionate about environmental issues, have a vibrant outdoor lifestyle, eat healthy foods, recycle their rubbish Middle class young professional couples; late 20’s to mid 30yrs, 0 to 2 kids, Educated Reduce emissions, save money on bills, contribute to improving the climate
Less Bill Payers They care about nature, frugal with money, shop for bargains, business owners Middle aged 35 to 40yrs, middle class couple, no kids yet, obdurate urban dwellers Save money, increase value of their home, claim the RHI tax
Change Seekers These are people who enjoy rural pursuits and explore opportunities to improve their surroundings and don’t mind making huge purchases to achieve that goal Mature couple 45+ with grown up kids, living in rural area, upper middle class, Affluent, very well educated Upgrade their boiler, save on bills, claim tax rebate
Property Developers These are people who want to increase their property portfolio in line with legislation, willing to invest in new ideas proven to be profitable, they are outdoor people, they are business savvy Mature individuals and/or couples, 45+, upper class, both urban and rural dwellers Build low CO2 homes, claim RHI, set trend for others, market leader in eco-friendly home builds

TARGETING

From the segmentation exercise, the strongest target group is the property developers. Most studies looked at drew attention to high volume of GSHP installations being prevalent in the new builds sector compared to retrofitting in existing properties. One such survey described the heat pump market as a niche sector with domestic installations mostly in new builds. It also highlighted that households tended to be wealthier and older than the average population. (Bergman, 2012)
The Change seekers group also fit the profile but will be considered as a moderate target.
Target Decision Matrix: In order to successfully target both Property Developers (B2B) and Change seekers (B2C) two different strategies will have to be adopted but for the purpose of this report, focus is on B2B.
Segment Name Segment Attractiveness (High, Med or Low) Relative Company Strength (Weak, Moderate or Strong) Targeting Decision (Prime, Secondary or Don’t Target) For Targeted Segment
What are the Hygiene Factors? What are possible Motivators?
Property Developers High Strong Prime Target Portfolio of Energy efficient homes Increase in profits from sales and RHI claims
Change Seekers Medium Strong Secondary Target Upgrade of heating Add value to their home and reliable source of heating
Environment Savers Medium Moderate Secondary Target Cost savings Clean air/ less pollution
Less Bill Payers Low Weak Do Not Target Energy Security Save on bills and RHI
Competitive Strengths & Weakness Analysis; Customer Choice Factors. Most important are; Energy Efficiency and Cost Savings.
Customer Choice Factors GSHP Company Kensa Heating ICAX
Amber Heating Alternative Heat Co.
Energy Efficiency Rating A A A A A
Cost Saving Excellent Good Excellent Moderate Average
Build Quality Excellent Excellent Average Average Good
Warranty Offered 10yrs 10yrs 7yrs 8yrs 7yrs
Location Yorkshire Truro London Wiltshire Northern Ireland
24hr Response Yes Yes Yes Yes Yes
POSITIONING
Positioning of GSHP company in the home heating market;
Positioning Strategy;
• Targeted marketing at core market sectors
• Form close business relationships with property developers
• Give presentations at rural events where majority of properties are off gas mains
• Attend trade fairs
• Invest in online and social media tools to reach the wider market
• Source best quality equipment
• Invest in training of all employees to be MCS certified

DISCUSSION & JUSTIFICATION

In a 2016 article by the Department of Energy & Climate Change, looking at a mass market scenario for GSHPs, it was stated that GSHP manufacturing costs have been increasing and companies struggling to meet their margins. One of the reasons is due to strong competition from Air Source Heat Pumps which already have a mass market reach due to having similar components to refrigeration appliances. Also, ASHPs are catching up to the efficiency of GSHP due to investment in R&D. It was noted that some of the Asian air conditioning companies are now turning attention to GSHP and using their distribution networks to sell GSHP equipment. The long-term impact is the potential reduction of installer and distributor overheads. (Hardy, Sudgen, & Dale, 2016)
There are challenges in the GSHP industry, however it will continue to grow, and the potential exists for profitable rewards. Financial analysis scenarios showed tight profit margins that were only boosted by the addition of RHI payments. On the GSHP association website, there are about 55 installers of GSHPs throughout the UK. With an average of around 20,000 heat pump installations annually, gives 363 pumps per installer.
The deployment strategy will involve having a range of purchase options as shown in the finance calculations. They will be based on number of bulk purchases and be covered under warranty for a set time after which there is the option to renew.
Success will depend in a large part on the government RHI scheme.

MARKET POTENTIAL & GROWTH FORECAST

With the potential of over 300 pump installations per year and taking finance numbers into account, average number of pumps from 3 finance scenarios is 159 units. This is a decent starting point and leaves room for growth.

ISSUES AND CHALLENGES

Barriers to entry and issues to consider;

• Low carbon heat technology market in the UK is still growing due to the dominance of gas boiler industry
• Low carbon technology is still a niche sector due to small target market, lack of public awareness,
• Uncertainty elements such as; capital costs, fuel prices, electricity grid emission intensity
• Microgeneration Certification Scheme (MCS) which every installer must have
• RHI payment is a major factor preventing uptake. See table below;

England, Scotland & Wales: Typical annual savings from bills and RHI payments when heating system in well insulated four bed detached home is replaced with an average GSHP. It should be noted that the RHI is no longer available in Northern Ireland. (Energy Saving Trust, 2018)
Existing System Bill Savings (£/yr) RHI Payment (£/yr) Carbon Dioxide savings (Kg CO2/yr)
Gas; Old G-rated boiler Gas; New A-rated boiler 505 to 580
65 2,335 to 2,750 3,600 to 4,200 1,200 to 1,300
Electric; Old Heaters Electric; New Heaters 900 to 1,110 570 to 665 4,900 to 6,000 3,500 to 4,100
Oil; Old G-rated boiler Oil; New A-rated boiler 560 to 665 An increase of 55 to 65 5,500 to 6,500 2,500 to 3,000
LPG; Old G-rated boiler LPG; New A-rated boiler 1,245 to 1,470
485 to 565 4,500 to 5,300 2,000 to 8,600
Coal Burner 525 to 645 7,200 to 8,600

RECOMMENDATIONS TO INVESTOR(S)

The recommendation would be to invest in the GSHP market as there is potential for profitability however the RHI must be a major factor in the decision as it could be the difference between making a profit or loss.
17.1.2019